Erdoğan writes unorthodox interest rate theory into economic blueprint

(Story was updated with more details of interest-rate policy in fourth and sixth paragraphs.)

Turkish President Recep Tayyip Erdoğan inserted a controversial theory on the relationship between interest rates and inflation into an economic blueprint for the next five years, Gazete Duvar reported on Tuesday.

Erdoğan says that higher interest rates cause inflation, the opposite of what classical economic theory states. The 2019-2023 plan, Turkey’s 11th development programme, was presented to parliament for approval this week after Erdoğan sacked the governor of the central bank at the weekend for failing to cut rates.

“High interest rates cause inflation by directly impacting the cost of the production of goods and services,” the draft of the plan stated, according to the news website. “Rising inflation then causes an increase in interest rates in a vicious circle.

"Therefore, steps to lower interest rates will cause a reduction in inflation and an increase in investment, thus paving the way for more production. Rising production will then pull inflation down."

Erdoğan’s comments to investors in London last May that interest rates spur inflation contributed to a currency crisis that brought a recession and a series of central bank rate hikes. Inflation surged to 25.2 percent in October before a rate increase of 625 basis points the previous month started to slow price increases and lower inflation to less than 16 percent last month.

"This approach will both reduce inflation permanently and bring economic growth to desired levels during the plan's period," the draft stated, Gazete Duvar said.

The Turkish president told members of his ruling party that he sacked governor Murat Çetinkaya because he failed to respond to the government’s calls to lower rates, according to local press reports at the weekend. Erdoğan has appointed deputy governor Murat Uysal, who is known for his more dovish policies, as Çetinkaya’s replacement.

The central bank is next due to meet on rates on July 25. The benchmark interest rate in Turkey is 24 percent.

The lira lost more than 2 percent of its value on Monday morning after news broke of Çetinkaya’s firing. It rose 0.1 percent to 5.73 per dollar at 10:38 a.m. local time in Istanbul on Tuesday.